Sunday, August 30, 2009

Part 1. Review of Chapter 1: The Market at the Bottom of the Pyramid

CK Prahalad, in his book “The Fortune At The Bottom Of The Pyramid” has brought up the concept of a socio-economic pyramid according to which the entire society can be divided into five parts or five tiers: Tier 1 where Purchasing Power Parity is more than USD 20,000, Tier 2 and 3 where PPP is in the range USD 15,000 – 20,000, Tier 4 with PPP of USD 1,500 and the lowest segment Tier 5 with PPP less than USD 1,500. Since the population in the Tier 4 and 5 is more double the population in the upper parts of the pyramid, this signifies a huge potential. This segment needs to be tapped, but not in the traditional ways. Prahalad emphasized on the role of the individuals and private sector in this movement that he initiated about 14 years back. Talking of the “inclusive capitalism”, he says, “…private sector competition for this market will foster attention to the poor as consumers.” He also challenges the traditional myth that rural population is primarily poor and the urban population is primarily richer, which, he claims, is not the truth.
Though I completely agree with his philosophy and respect the amount of research that he has put into this book, I still feel that the first chapter has created more questions in my mind than it has answered. In a way, that was disappointing, but at the same time, I think he might have intentionally done so, or maybe my questions will be answered in the subsequent chapters as I read on.
The first conflict that this chapter has created is: Will it do any real sustainable good to the society if we encourage our BOP consumers to spend all that they earn that day? In this chapter, Prahalad has argued that there is enough money at the BOP. He claims that the total GDP of 9 developing countries put together is $13 trillion (PPP adjusted) and that represents a huge potential for big companies and MNCs to invest in. It is true that currently, the BOP population is spending more if adjusted for the poverty penalty, but do we really want to uplift this market segment or try to compete for sucking this market off all the blood it has? If the current income is completely converted into current expenditure, won’t this sector be helpless in times of need? Microfinance and micro-credit have come up as very useful options for the poor, but they do not come in handy for the people who do not use them for creating a personal business. Also, Prahalad says that the poor might not want to spend on sanitation and clean water but they do spend on luxurious items and that’s where the companies should try to tap in. The conflict here is that whether he proposes a social entrepreneurship model or a business entrepreneurship one because the former will try to reverse the situation while the later will try to tap the situation as it is without paying a heal to the overall goodwill of the BOP segment.
The second major issue that I see with Prahalad’s argument on supply chain is: Is it economically viable to sell the products beyond Dharavi slum of Mumbai, India? Though this question has been answered in the book, the argument seems to be rotating only around the big cities which are expected to have the density of urban poor to the tune of 15,000 per hectare by 2015. He has also mentioned about the Shakti project of HLL in India which empowers the women to be entrepreneurs in their own power. But how feasible is it to tap into the markets that are far away from even the nearest towns and are sparsely populated, like the people in the North Eastern states of India or the ones residing in the hills of Himachal Pradesh in India or the ones living in the Siberian desert of Russia. Though they have been counted in the 3 billion strong potential customer base, there is no way the companies can reach there without a support from the government in terms of subsidies and tax exemption. All in all, it doesn’t make an economic sense because those dispersed markets do not have a critical mass to support an economic project. For such markets, we need to come up with some other models that are economically viable in the long run.
The third issue with this chapter is about the confusion that it creates about ITC’s e-choupal program in India. After reading this chapter, it becomes very confusing to decide whether e-choupal is a philanthropic initiative taken by ITC as a part of its CSR or is it a business model as well which is benefitting the farmers to as great an extent as it is doing to ITC. If it’s a philanthropic initiative, I think Prahalad has been a bit confused because he contradicts what his own statement that “charity might feel good, but it rarely solves the problem in a scalable and suitable fashion.” If it’s just a charity, it prevents other companies to compete for technological advances in this sector. But, if it’s a business model as well, no clarification has been given on it in the chapter. I look forward to read about it in the second part of the book that has the case-study on ITC e-choupal.
Though these arguments might seem to be a criticism of the well known professor, arguments like these will certainly end up with a better model for the overall development of the BOP and the entire pyramid.

Arun Sharma


  1. i wud say, more u spend , increased is the urge to earn more, if the bpl customers is spending on luxorious items , that is gud for the society.

  2. Thanks Piyush for the comment. But I'm not sure if it's good to inculcate the habit of living a lent-out life and especially so when your children do not have clean water to drink and your wife doesn't have a covered space to have a bath.

  3. ITC's e-choupal or DCM Shriram's Hariyali stores are pure commercial outlets. Analysts have always misread and miscalculated India. See what happened to organized retail experiment. Big investments were made thinking India is the place for Wal-Mart outlets. But more or less all the oulets- Big Bazar, Vishal Retail, Subhiksha are now panting and puffing for breath. I don't agree with any of the arguments of Mr Kakkar. And neither with what Piyush says. Arun you are right to say that the real test of demand lies outside slums of Mumbai and Delhi. Looking forward to more insights on Kakkar's work.....

  4. Sorry amends to my comment...plz read Mr Prahalad in place of Mr Kakkar.....